Sunday, January 14, 2018

Evicted: Poverty and Profit in the American City tells the story of how greed and the nation's legal system have driven poor Americans to the brink of homelessness. Author Matthew Desmond follows the lives of eight Milwaukee residents who scramble from day to day to avoid being evicted from their homes and thrown into the street. It is a good read, and I highly recommend it.

As I read Desmond's book, I was struck by the similarity between the low-income housing crisis and the student-loan crisis. As Martin Luther King observed, "Every condition exists simply because someone profits by its existence." Slumlords profit from renting substandard housing to the poor; stockholders and hedge fund owners profit from for-profit colleges.

And slumlords and for-profit colleges both rely on the government to help them exploit the poor. Slumlords can call on the local sheriff to evict tenants for nonpayment; and for-profit colleges rely on Betsy DeVos's Department of Education to protect their venal interests. Landlord-tenant laws favor the landlords, and the Bankruptcy Code protects the banks, which loan money to students at exorbitant interest rates, knowing that student debtors will find it almost impossible to discharge their onerous debts in the bankruptcy courts.

As Desmond wrote in Evicted, "The United States was founded on the noble idea that people have 'certain inalienable Rights, that among these are Life, Liberty and the pursuit of Happiness." Indeed, the nation's founders considered these rights to be God-given and "essential to the American character."

Desmond argues that "the ideal of liberty has always incorporated not only religious and civil freedoms but also the right to flourish." In twenty-first century America, people need decent housing to flourish and they also need freely accessible education.

But our federal student-loan program is designed to extinguish the American right to pursue happiness and to flourish. The federal government allows corrupt for-profit colleges to lure vulnerable people into enrolling in education programs that are far too expensive and often worthless. The victims are forced to take out student loans. And the federal government stands by to be every student's sugar daddy--distributing about $150 billion a year in various forms of student aid.

The for-profit colleges get more than their fair share of federal money. In fact, many of them receive from 80 to 90 percent of their entire operating budgets from federal student loans and federal Pell grants.

Then when student-loan victims are unable to find well-paying jobs to service their debt, our once generous government becomes a tyrant. The Department of Education opposes bankruptcy relief for nearly everyone--even a quadriplegic (Myhre v. U.S. Department of Education, 2013) and people on the edge of homelessness (Abney v. U.S. Department of Education, 2015).

America will not begin solving the student-loan crisis until our nation's leaders acknowledge that the federal student-loan program is a massive human rights violation that is evicting millions of people from the middle class. Students who took out loans to attend for-profit colleges have been especially hard hit; almost half the students who took out loans to attend a for-profit college default on their loans within five years.

Student debtors are defaulting at the rate of 3,000 people a day, which ruins their credit and leaves them vulnerable to having their wages garnished. The government can even seize part of an elderly defaulter's Social Security check.

How can higher education return to decency and sanity? First, we must remove Betsy DeVos from her post as Secretary of Education. DeVos is about as qualified to run the Department of Education as the late Charlie Manson. And then we must revise the Bankruptcy Code to allow honest but unfortunate student debtors to discharge their loans in bankruptcy court. And finally, we must shut down the for-profit college industry, which DeVos so assiduously protects.

Wednesday, January 3, 2018

James Howard Kunstler posted an essay a few days ago containing his predictions for American higher education in the coming year. He predicts big trouble.

As Kunstler correctly observed, "college has become, most of all, a money-grubbing racket tuned to the flow of exorbitant student loans for exorbitant college costs." In other words, as he has said before, higher education in the United States basically operates from a "criminal ethic" where costs have "developed an inverse relationship to the value of a college education."

Kunstler's essay also includes a withering assessment of college leadership: "The presidents, deans, and faculty of colleges around the country have turned into the most obdurate enemies of free thought since the Spanish Inquisition, a gang of cowards and villains who disgrace the meaning and purpose of higher ed[ucation]."

In fact, Kunstler's indictment of the people who run American colleges is too gentle. If these clowns lived in another age, they would be the people who staffed the French Vichy regime during Word War II--the bureaucrats who dutifully rounded up French Jews for the Nazis and shipped them from Paris to the German death camps. No courage, no intellect, no sense of decency whatsoever. They babble ceaselessly about trigger words, safe spaces and "white male heterosexual privilege" while they pick their students' pockets.

The federal student loan program is quietly and inexorably destroying the lives of millions of Americans; has anyone in higher education spoken up? Have the presidents of Harvard, Yale, University of Chicago, Brown, Johns Hopkins, or the University of Michigan uttered a single word of criticism about it? Has any university leader endorsed bankruptcy relief for overburdened student debtors? Has any college president or dean criticized the government policy of garnishing Social Security checks of elderly student-loan defaulters? Has any higher-education leader of national standing called for the closure of the for-profit college industry?

No, our elite colleges and universities are almost as addicted to federal student-aid money as the sleaziest for-profit schools. In terms of dependency on federal money, there is not a dime's worth of difference between Harvard and Bob's Beauty Academy.

Kunstler predicts that "a shocking number of small four-year colleges will go out of business this year," and I share his view. Harvard professor Clayton Christensen said recently that half of American colleges will be bankrupt in 10 to 15 years.

In fact, the small liberal arts college is dead, although the leaders of some small colleges stubbornly keep their institutions on life support. Parents need to warn their children to stay away from these decaying institutions. It would be a grave mistake to borrow $100,000 to get a degree from a college that will close before its graduates pay off their student loans.

Thursday, October 26, 2017

Corinthian Colleges filed for bankruptcy in 2015, and ITT Tech went bankrupt a year later. Together, the two for-profit college companies left more than half a million students and former students in the lurch. Thousands of these victims filed so-called borrower-defense claims with the Department of Education, asking DOE to forgive their student loans on the grounds that they were defrauded.

The Obama administration approved regulations for processing these claims, but Betsy DeVos put them on hold. She was concerned, she said, that the Obama rules might give undeserving students "free money."

Now DOE has approved a panel of 17 experts to overhaul the Obama regulations. According to a story in Inside Higher Ed, the DeVos Department anticipates the new rules won't go into effect until 2019. Under that timetable, defrauded borrowers won't even have an avenue of relief until four years after Corinthian filed for bankruptcy.

Meanwhile, hundreds of thousands of student borrowers who attended one of the Corinthian schools, ITT Tech, and dozens of other dodgy for-profit colleges will be making monthly loan payments for worthless education experiences. Hundreds of thousands of others will put their loans into deferment, which will relieve them from making loan payments but will cause their loan balances to go up due to accruing interest. And thousands more will simply default, which will allow the federal government's sleazy loan collectors to slap on penalties and fees to their loan balances.

But DeVos doesn't give a damn about the carnage wreaked by the corrupt for-profit college industry. In fact, she is doing everything she can to prop it up.

And so, Betsy DeVos, Amway heiress and for-profit co-conspirator, lumbers along like a Galapagos tortoise, oblivious to the misery experienced by millions of student debtors--who are now defaulting at the rate of 3,000 a day.

Saturday, October 7, 2017

In a previous essay, I wrote about Alan and Catherine Murray, a married couple in their late forties who defeated Educational Credit Management Corporation in a Kansas bankruptcy court. ECMC appealed, and the Murrays prevailed again--a victory that has important implications for middle-income student-loan debtors.

The Murrays took out student loans in the 1990s to obtain undergraduate degrees and master's degrees. Their total indebtedness was $77,000, which they consolidated in 1996 at an interest rate of 9 percent.

Over the years, the Murrays paid $54,000 toward paying off these loans--70 percent of the amount they borrowed. But they obtained economic hardship deferments during periods of financial stress, which allowed them to skip some loan payments. And they entered into an income-based repayment plan to lower their monthly payments to a manageable level.

Although the Murrays handled their student loans in good faith, interest on their debt continued to accrue; and they made no progress toward paying off their debt. In fact, when they filed for bankruptcy in 2014, their loan balance had ballooned to $311,000--four times what they borrowed!

Judge Dale L. Somers, a Kansas bankruptcy judge, gave the Murrays a partial bankruptcy charge. It was clear, Judge Somers ruled, that the Murrays could not pay off their total student-loan indebtedness and maintain a minimal standard of living. And it was also clear that their financial situation was not likely to change. Finally, Judge Somers concluded, the Murrays had handled their student loans in good faith--an essential requirement for discharging student loans in bankruptcy.

On the other hand, Judge Somers determined, the Murrays could pay off the original amount they borrowed ($77,000) and still maintain a minimal standard of living. Thus, Judge Somers discharged the accumulated interest on the Murrays' debt, but required them to pay back the original amount they borrowed.

ECMC, the Murrays' ruthless creditor, appealed Judge Somers' decision. ECMC argued, as it always does, that the Murrays should be put in a long-term income-based repayment plan (IBR) that would last from 20 or 25 years.

But U.S. District Court Judge Carlos Murguia, sitting as an appellate court for the appeal, affirmed Judge Somers' decision. "The court agrees with Judge Somers' findings and conclusions that [the Murrays] made a good faith effort to repay their loans," Judge Murguia wrote.

Significantly, Judge Murguia, ruling in the capacity of an appellate judge, explicitly rejected ECMC's argument that the Murrays should be placed in an IBR and that none of the Murrays' $311,000 debt should be forgiven.

"The court disagrees," Judge Murguia wrote. "Under the circumstances of this case, debtors' payments under an IBR plan are insufficient even to stop the accrual of additional interest, and such payments directly contravene the purpose of bankruptcy." Judge Murguia noted that Judge Somers had not discharged all of the Murrays' indebtedness--only the accumulated interest. "He discharged that portion--the interest--that had become an undue hardship on debtors, denying them a fresh start."

ECMC v. Murray is an important case for two reasons: First, this is one of the few student-loan bankruptcy court decisions that have granted relief to middle-income student borrowers. The Murrays' combined income was about $95,000.

Second, the key ruling by both Judge Somers and Judge Murguia was their finding that the interest on the original debt would constitute an undue hardship for the Murrays if they were forced to pay it back. Furthermore, this would be true even if the Murrays were placed in an IBR because the monthly payments under such a repayment plan were insufficient to stop the accrual of interest.

There are hundreds of thousands of people in circumstances very similar to the Murrays. Their loan balances have doubled, tripled or even quadrupled due to accumulating interest. People in this situation will never pay off their total indebtedness. But most of these people, like the Murrays, can pay off the amount they originally borrowed if only the accumulated interest were wiped out.

Let us hope student loan debtors situated like the Murrays will learn about ECMC v. Murray and find the courage to file bankruptcy and seek a discharge of their student loans--or at least the accumulated interest. After all, it is the accumulated interest, penalties and fees that have put millions of student borrowers in a hopeless situation. The Murray decision offers a fair and reasonable solution for these people and gives them a fresh start. A fresh start, after all, is the core reason that bankruptcy courts exist.

Wednesday, October 4, 2017

The collapse of Corinthian Colleges and ITT Tech shined a light on the seedy for-profit college industry. Both for-profit college companies filed for bankruptcy under a cloud of accusations of fraud and misrepresentation.

Together, Corinthian and ITT Tech had more than half a million former students. Thousands of them filed so-called "borrower defense" claims, petitioning the Department of Education to forgive their student loans because they were defrauded by the institutions they attended. About 65,000 borrower-defense claims are now pending.

What to do? The Obama Administration prepared borrower-defense regulations that were scheduled to take effect on July 1, 2017; but Secretary of Education Betsy DeVos blocked their implementation, saying the rules would be rewritten through the "negotiated rule making" process. DeVos' decision will allow the for-profit industry a voice in reshaping the rules to their liking.

Why did DeVos block the Obama-era regulations? She said the regulations drafted by the Obama administration would allow students to get "free money" by having their loans forgiven. In other words, DeVos apparently assumes students who file fraud victims are themselves engaging in fraud by seeking debt relief.

This latest caper from DeVos' Department of Education tells us all we need to know about President Trump's least qualified cabinet appointee . Time and time again, DeVos has made decisions to benefit the for-profit colleges at the expense of students; and she has hired consultants who have worked in that sleazy industry.

Millions of people have borrowed money to attend overly expensive for-profit colleges only to receive educational experiences that are virtually worthless. Some were defrauded, some obtained degrees that did not lead to good jobs, and some just paid too much for substandard postsecondary programs. Unless these people obtain relief from their student-loan debt, they will never get on their feet financially.

The Obama administration's borrower-defense regulations were drafted to determine which for-profit students are fraud victims entitled to student-loan debt relief. In my mind, however, it is impossible to efficiently decide on a case-by-case basis which student borrowers are entitled to debt relief due to fraud. That would require hundreds of thousands of individual due-process hearings.

No, the only way to give worthy student-loan debtors a fresh start is through bankruptcy. Congress must amend the Bankruptcy Code to treat student loans like any other consumer debt.

If insolvent student-loan debtors were given reasonable access to bankruptcy, millions of cases would be filed and at least half a trillion dollars in debt would be wiped out.

A half trillion dollars in student-loan debt relief would be a big hit to the U.S. treasury, but let's face it. Millions of student loans will never be paid back. It would be far better for the overall national economy if student borrowers were given a fresh start rather than be forced into 20- and 25-year repayment plans in which borrowers make token monthly payments that don't even cover accruing interest.

DeVos either doesn't understand the magnitude of the student-loan debt crisis or she doesn't care. Either way, she is a disaster who needs to be cashiered.

Thursday, September 21, 2017

Awhile back, I posted an essay on Decena v. Citizens Bank, a bankruptcy court case that was decided last year in New York. Lorelei Decena had borrowed $161,000 to attend St. Christopher's College of Medicine in Senegal, West Africa. At the time Decena was studying at St. Christopher's, the school was not on the Department of Education's approved schools list.

After graduating, Ms. Decena returned to the United States to pursue a medical career. To her dismay, she discovered that her St. Christopher medical degree did not qualify her to take her medical boards exams in the U.S.; and she filed for bankruptcy.

As almost everyone knows, student loans cannot be discharged in bankruptcy unless the debtor can meet the "undue hardship" standard articulated in 11 U.S.C. sec. 523 of the Bankruptcy Code. The undue hardship standard applies not only to federal student loans but to private student loans as well. This is a very difficult standard to meet, and some courts have applied it harshly.

Fortunately, for Ms. Decena, the bankruptcy court ruled that her loans from Citizens Bank were not covered by the undue hardship rule because St. Christopher's College of Medicine was not on the Department of Education's approved schools list when she studied there. Thus her student loans could be discharged in bankruptcy like any other consumer loan. A great victory!

A few days ago, I was contacted by another New Yorker who had borrowed about $160,000 in student loans from Citizens Bank to attend a medical school in Great Britain. This school, like Decena's school, was not on DOE's approved schools list when he attended. And somewhat like Decena, this New Yorker discovered that his overseas medical degree does not qualify him to practice medicine in New York.

Obviously, this fellow has a very good argument that his student loans can be discharged in bankruptcy in the same manner as Ms. Decena's loans. He contacted Citizens Bank and was told that the bank had sold the loan to a debt collection company. He then wrote the debt collector and enclosed a copy of the Decena case. So far, no response.

What's going on here? Is Citizens Bank routinely making student loans to people enrolled in overseas medical schools? And is it lending money to people attending foreign schools that are not on the Department of Education's approved schools list?

Although it is not well known, the Department of Education gives out student loans for Americans to attend foreign colleges and universities; and there are universities from all over the world on DOE's approved schools list. Some of these institutions are foreign medical schools.

In my view, the government should not be lending money for people to study at foreign universities. The United States has plenty of colleges. Moreover, post-secondary enrollments are in decline in the U.S.; and there are lots of empty seats at American institutions.

And I don't think private banks should be lending money to people so they can study at foreign medical schools, particularly when it is unclear whether a foreign medical degree qualifies graduates to practice medicine in the U.S.

But if our government and the banks are going to continue the reckless practice of handing out student loans for people to study in foreign countries, then the people who accept those loans should be able to discharge their student debt in bankruptcy if they discover that their foreign degrees are worthless to them.

References

Decena v. Citizens Bank, 549 B.R. 11 (Bankr. E.D.N.Y. 2016).

Note: Citizens Bank appealed the bankruptcy court's decision to a federal district court, arguing that it had not received proper service of the lawsuit. The district court vacated the bankruptcy court's ruling based on a technicality without disturbing the underlying rationale of the bankruptcy court's decision in favor of Ms. Decena. Citizens Bank v. Decena, 562 B.R. 202 (E.D.N.Y. 2016).

Friday, January 6, 2017

Globe University and Minnesota School of Business (MSB) began closing their campuses last month. The two for-profit institutions once operated in three states--Minnesota, South Dakota, and Wisconsin; but a series of regulatory and court actions brought them down.

In September, a Minnesota court ruled that Globe and MSB committed fraud by inducing students to enroll in their criminal justice programs. Not long after, the Department of Education cut them off from federal student-aid funding. No for-profit college can survive a month without federal student-loan revenue, so DOE's action amounted to a death sentence for both institutions.

The demise of Globe and MSB follow in a train of college shutdowns over the past couple of years. The casualty lists includes Corinthian Colleges and ITT, two for-profits that declared bankruptcy. St. Catharine College and Dowling College also shut their doors, along with Virginia Intermont College.

DOE has more than 500 colleges on its "heightened cash monitoring" watch list, and many of these schools will shut down within the next three or four years. In a 2015 report, Moody's Investment Services predicted colleges would close at the rate of 15 per year commencing this year.

Now is the time for Congress to pass legislation to protect colleges' former students when the institution they attended shuts down. At a minimum, Congress should do the following:

I. Congress should pass legislation requiring every defunct college to deposit all student records in a central federal depository.

First student records at failed colleges must be preserved. Former students will need access to their official transcripts for decades after their alma mater closes, but how will they get those transcripts 25 years after the institution they attended shut its doors?

Currently, some closing colleges are voluntarily making arrangements to preserve student records. Dowling College, for example, which filed for bankruptcy in 2016, sent its student records to nearby Long Island University.

But not all closing colleges will act as responsibly as Dowling. In particular, colleges that are accused of defrauding their students have no incentive to preserve student records because those records might be used against them in legal proceedings.

Congress needs to adopt legislation that requires every college that receives federal funds to send all student records, including transcripts, to a federal records depository in the event of a closure. And colleges should be required to digitize their student records according to a standardized protocol so that the process of transferring records after a college closes can be done quickly and efficiently.

II. Non-operating colleges should forgive any loans owed to them by former students.

Most nonpublic colleges depend on federal student aid money for the bulk of their revenues, but some also lend money directly to their students. For example, Globe and MSB loaned money to their students at interest rates as high as 18 percent. According to a Minnesota court decision, the two institutions loaned money to approximately 6,000 students between 2009 and 2016.

Globe and MSB will be defunct in a matter of weeks, but the loans they made to students are debts they may try to collect. Federal law should require every college that loans money to students to forgive those loans if the college closes. As a matter of simple justice, a college that shuts down shouldn't be chasing after students who owe it money.

III. Congress should ease the path to bankruptcy relief for students who attended for-profit colleges.

Finally, Congress needs to streamline the loan-forgiveness process for students who attend for-profit colleges and received no economic benefit from the experience. It is particularly unjust for students to be on the hook for student loans taken out to attend a for-profit college that closed after being found guilty of fraud.

Under DOE regulations, students can apply to have their student loans discharged if they can make one of two showings: 1) they were induced to enroll based on fraud, or 2) they took out loans to attend a college that closed while they were enrolled or within 120 days of being enrolled.

Unfortunately, the administrative process for resolving discharge applications is slow and entirely inadequate to deal with the potential volume of claims. After all, Corinthian Colleges and ITT, which are both in bankruptcy, have around a half million former students between them.

Currently, the Bankruptcy Code bars debtors from discharging student loans in bankruptcy unless they can show that paying back their loans would create an "undue hardship." Most bankruptcy courts have interpreted the undue hardship standard harshly, making it incredibly difficult for most college borrowers to clear their student loans through the bankruptcy process.

Congress should pass legislation that eliminates the undue hardship standard for all people who took out loans to attend a for-profit college and wound up broke. The five-year default rate for a recent cohort of students who attended for-profit colleges is 47 percent--a clear indication that a lot of people got no benefit from attending a for-profit institution.

Conclusion: The Nation faces a swelling tide of college closures and needs an orderly process for shutting down higher education institutions.

One thing is certain: colleges are closing at an accelerating rate; and the Nation need an orderly process to minimize the harm to defunct colleges' former students. Student records must be safeguarded, student debt to failed institutions should be wiped out, and Congress needs to amend the Bankruptcy Code to allow former for-profit college students to obtain bankruptcy relief.

Wednesday, November 30, 2016

Betsy DeVos, Donald Trump's choice for Secretary of Education, has no experience in higher education, and that may be a good thing for student-loan debtors.

Most commentators on the student-loan crisis are insiders who want to maintain the status quo regarding the federal student loan program. The universities depend on regular infusions of student-loan money, which enables them to raise their tuition prices year after year at twice the rate of inflation.

But DeVos has no ties to higher education at all, and thus she has the capacity to look at the student-loan catastrophe from a fresh perspective. In fact, DeVos has the power to do one simple thing that could potentially bring relief to millions of distressed student-loan debtors.

Under current bankruptcy law, debtors cannot discharge their student loans in bankruptcy unless they can show that repaying the loans will cause them "undue hardship." In nearly every case, the Department of Education and the student-loan guaranty companies argue that student-loan debtors should be denied bankruptcy relief under the undue hardship standard.

Instead, they routinely demand that distressed college borrowers enroll in long-term income-based repayment plans that can last for 20 or even 25 years. And DOE and its debt collectors make this demand even when debtors' income is so low that they pay nothing or next to nothing under the terms of these plans.

Here are some examples:

In the Edwards case, decided last spring, Educational Credit Management (ECMC) argued that Rita Gail Edwards, a woman in her mid-50s, should pay $56 a month for 25 years to service a debt of almost a quarter of a million dollars!

In the Roth case, ECMC opposed bankruptcy relief for Janet Roth, an elderly woman with chronic health problems who was living on Social Security income of less than $800 a month. Instead, ECMC wanted Roth to enter a long-term repayment plan even though ECMC conceded that Roth's income was so low that she would pay nothing under the plan.

In the Abney case, DOE wanted Abney, a 40-year-old father of two, to enter a 25-year income-based repayment plan. Abney was living on $1200 a month and was so poor he couldn't afford a car and rode a bicycle to get to his job.

In essence, DOE and the debt collectors maintain that almost no one is entitled to discharge their student loans in bankruptcy and that everyone should be placed in long-term, income based repayment plans.

What if Secretary DeVos simply decreed that DOE and the loan guaranty agencies will stop pushing long-term repayment plans in the bankruptcy courts and would consent to bankruptcy discharges for people like Roth, Edwards, and Abney? (Incidentally, in all three cases, the bankruptcy courts rejected the creditors' arguments and discharged the student loans in their entirety.)

By consenting to bankruptcy discharges for people like Abney, Edwards and Roth, the Department of Education would signal to the bankruptcy courts that it supports a less harsh interpretation of the "undue hardship" standard. That would open the door for thousands of people of distressed debtors to file bankruptcy to discharge their student loans.

Some people might argue that my proposal would unleash a flood of bankruptcy filings that would undermine the financial integrity of the federal student loan program. But let's face facts. People like Roth, Edwards and Abney would never have paid back their student loans, and placing them in 25-year repayment plans that would have obligated them to make token payments that would have done nothing more than maintain the cynical fiction that their loans weren't in default.

Wouldn't it be better for DOE to be candid about the student-loan crisis and admit that millions of people will never pay back their loans? Wouldn't it be better public policy to allow honest but unfortunate debtors to get the fresh start that the bankruptcy courts are intended to provide?

Betsy DeVos is fresh on the scene of the student-loan catastrophe. Let's hope she brings some fresh thinking to the U.S. Department of Education.

Monday, September 26, 2016

Last week, the U.S. Department of Education announced that it is stripping the Accrediting Council for Independent Colleges and Schools (ACICS) of its accrediting authority. As Donald Trump might put it, this is a HUUGE deal.

ACICS is the biggest accrediting body for the for-profit college industry. As of last June, ACICS accredited 245 schools enrolling about 800,000 students. All those schools must be credentialed by an accreditation agency approved by DOE in order to obtain federal student aid money. So when DOE decertified ACICS, it put more than 200 for-profit institutions at extreme risk of closing.

Why did DOE take such drastic action against ACICS?

Why did DOE take this drastic action? DOE accuses ACICS of lax oversight of the for-profit college industry. Two large for-profits filed for bankruptcy recently--Corinthian Colleges and ITT Tech; both companies were accredited by ACICS. Other for-profits have been investigated for fraud, misrepresentation, and high-pressure recruiting tactics.

The industry as a whole has notoriously high student-loan default rates. According to a Brookings Institution report, almost half of a recent cohort of for-profit students defaulted on their student loans within five years of beginning repayment. Ben Miller, a senior spokesperson for the Center for American Progress, approved of DOE's action: "With its lengthy track record of shoddy oversight--that has led to billions of dollars squandered--ACICS had abused the public's trust and could not be allowed to continue granting access to federal dollars."

What will happen to the 200 plus colleges and schools that were accredited by ACICS?

What will happen to the 200 plus for-profit colleges that are no longer accredited by a DOE-approved accrediting body? Assuming ACICS loses its appeal of DOE's decision, which seems likely, for-profit colleges will have 18 months to obtain accreditation by another DOE-approved accreditor. That will be very difficult to do--especially for small for--profit colleges, As one West Virginia educator explained: "There aren't thousands of accreditors that schools can go to, there's really just a handful. They all have very specific niches to fill." And those accrediting bodies will likely be deluged with applications from colleges that were formerly accredited by ACICS.

In short, the fall of ACICS will inevitably have a domino effect on for-profit colleges. Those that don't quickly become re-accredited by a DOE-approved agency will lose access to federal student-aid money and will collapse. When the colleges collapse, their students' studies will be disrupted. The vast majority of all for-profit students took out federal student loans to finance their tuition. If their college closes, they will have just two choices: They can transfer to another institution that will take their former college's credits or they can apply to DOE to have their loans forgiven under DOE's"closed school" exemption process.Does DOE have a sinister motive in disrupting the for-profit college industry?

The Obama administration will say its drastic action against ACICS is a justified response to the accreditor's shoddy oversight of the for-profit college industry. And maybe that explanation is sincere.

But why did DOE wait until the waning days of President Obama's second term in office to act? I wonder whether DOE might be intentionally disrupting the for-profit college industry so that inside players can step in and scoop up some faltering for-profit colleges in order to reap huge profits.

And Apollo Education Group, owner of the University of Phoenix, is being bought out by a consortium of equity groups led by Martin Nesbitt, President Obama's former campaign manager and president of the Obama Foundation. Tony Miller, a former Deputy Secretary of Education, will run the University of Phoenix. Cozy!

Time will tell us what is going on here. The for--profit college industry is a sleazy business, and I have argued repeatedly that DOE should shut it down. DOE's decision last week to strip ACICS of its accrediting authority is a big step toward doing just that.

But if we see more political insiders come in and buy struggling for-profits as Martin Nesbitt is doing with the University of Phoenix, that may be an indication, that DOE's death sentence for ACICS is nothing more than a calculated play to drive down the value of for-profit colleges so that powerful financial interests can scoop them up.

One thing we know for sure: Bill and Hillary Clinton are very close to the for-profit college racket. Bill, we remember, got paid nearly $18 million to serve as "Honorary Chancellor" of Laureate Education Group; and Hillary is tight with Goldman Sachs, which has an ownership interest in a for-profit education company.

Tuesday, September 20, 2016

ITT Educational Services, a for-profit corporation operating more than 130 vocational and technical training schools, filed for bankruptcy earlier this month. The Department of Education shut off student aid money to ITT in late August, and the corporation quickly collapsed.

ITT's bankruptcy left about 35,000 students in the lurch. Most of them took out federal student loans to pay ITT's extraordinarily high tuition, and none of them will be able to complete their studies. DOE Secretary John King sent a message to these students telling them they had just two options: transfer their credits to other institutions or file for loan forgiveness under DOE's "closed school"forgiveness regulations.

On September 15, 23 Democratic Senators sent Secretary King a letter asking DOE to grant ITT's former students special assistance. The letter is slightly incoherent, which is understandable given the fact that 23 politicians had to agree on the text. Nevertheless, the Senators articulated several specific requests for relief.

Extending the eligibility guidelines for total student-debt relief for ITT's former students. First, the Senators want DOE to loosen the eligibility requirements for ITT students who file for total loan forgiveness under DOE's "closed school" relief regulations. Under current DOE guidelines, ITT's former students can apply for debt relief under DOE's "closed school" procedures if they were enrolled at ITT at the time it closed or withdrew from ITT up to 120 days prior to closure.

The Democrats asked Secretary King to expand the 120-day window to a little more than two years. If King grants this request, any student who withdrew from ITT on or after March 1, 2014 will qualify to have their ITT student loans forgiven under DOE's "closed school" discharge process.

Preservation of ITT's student records. The Senators also asked DOE to preserve all of ITT's documents and records that might be relevant to an ongoing investigation of ITT's activities or that could be helpful to students seeking to get their loans discharged..

Explore legal authority to automatically discharge ITT students' federal loans. Finally, the Senators urged DOE to determine its authority to automatically discharge student loans of ITT students and to consider discharging loans of all students who don't transfer their ITT credits to another institution within three years and who are otherwise eligible for a "closed school" discharge.

All these recommendations are commendable but they are far too timid. After all, as the Senators attested in their letter, DOE shut off ITT's funding based on serious concerns about "ITT Tech's deceptive practices, dubious educational quality, and financial integrity."

As reported in Bloomberg News, the U.S. Securities and Exchange Commission sued ITT for fraud in 2015, and the Consumer Financial Protection Bureau sued the company in in 2014, "accusing it of overstating students' job prospects and potential salaries and then pushing them into high-cost private loans that were likely to default." Both suits are still pending.

ITT has enrolled thousands of students over the years. Many of these students--my guess is most of them--received little or no economic benefit for their ITT tuition dollars.

I'm sure ITT can point to some students who completed their ITT studies and found good paying jobs, but I think for every success story there is surely one or more students who got no economic benefit from their ITT studies and wound up heavily in debt.

One thing is certain. The for-profit college industry is imploding, and DOE needs a comprehensive process for assisting students who attended one of the collapsing for-profit schools. Several years ago, Professor Robert C. Cloud and I proposed a change in the Bankruptcy Code that would allow anyone who accumulated student-loan debt from attending a for-profit college and who is insolvent to receive a bankruptcy discharge of student-loan debt without having to show "undue hardship."

In other words, we argued that student debt acquired to attend a for-profit college should be treated like any other unsecured debt, which would make it readily dischargeable in bankruptcy. In my view, this proposal makes more sense than for DOE to deal with each collapsing for-profit college on an ad hoc basis.

Let's see if our U.S. Senators have the courage to offer broader relief for for-profit college students than the tepid proposals contained in the Democratic Senators' recent letter.

References

RichardFossey, Robert C. Cloud, R.
(2011). From the cone of uncertainty to the dirty side of the storm: A proposal
to provide student-loan debtors who attended for-profit colleges with
reasonable access to the bankruptcy courts. Education
Law Reporter, 272, 1-18.

Wednesday, August 31, 2016

Investipedia defines quantitative easing as the process of increasing the money supply "by flooding financial institutions with capital in an effort to promote increased lending and liquidity." Or more simply--quantitative easing is printing new money.The Obama administration has done a lot of quantitative easing. At the height of its QE program, the government was pumping a trillion bucks a year into the economy. But there is another type of quantitative easing that is less well known. The government has been loaning billions of dollars to students under the federal student loan program, and it is only getting about half that money back. Who benefits? The higher education industry has gotten this money, including the stock holders and equity funds that own private colleges and universities. Conner v. U.S. Department of Education, a recent federal court decision, illustrates how QE works in the education sector. Patricia Conner, a Michigan school teacher, took out 26 separate student loans over a period of 14 years to pursue graduate education in three fields: education, business administration, and communications. By the time she filed for bankruptcy at age 61, she had accumulated over $214,000 in student-loan debt. According to the bankruptcy court, Conner did not make a single voluntary payment on any of her loans.In the bankruptcy court, Conner argued that her debt should be discharged under the Bankruptcy Code's "undue hardship" standard, citing her advanced age as a factor that should weigh in her favor. But a Michigan bankruptcy court refused to release Conner from her debt, and a federal district court upheld the bankruptcy court's opinion on appeal. The district court ruled that Conner's age could not be a consideration since she borrowed the money in midlife knowing she would have to pay it back. The court also indicated that Conner should enroll in an income-based repayment plan (IBRP) that the government had offered her, which would obligate her to pay only $267 a month on her massive debt. The court did not say how long she would be obligated to make payments under an IBRP, but these plans generally stretch out for at least 20 years.

Let's assume Conner signs up for an income-based repayment plan and begins paying $267 a month on her $214,000 debt. Let's also assume, that the interest rate on this debt is 6 percent. At 6 percent, interest on $214,000 amounts to more than $12,000 a year, but Conner will only be paying about $3,200 a year toward paying off her student loans.

This means Conner's debt will be negatively amortizing--getting larger every year instead of smaller. After making payments for one year under her IBRP, Conner will owe $223,000. After the second year, she will owe around $233,000. After three years, Conner's debt will have grown to about a quarter of a million dollars, even if she faithfully makes every monthly loan payment.

Obviously, by the time Conner's IBRP comes to a conclusion in 20 or 25 years, she will owe substantially more than she borrowed, and she will be over 80 years old. In short, the government will never get back the money it loaned to Ms. Conner.

Who benefited from this arrangement? Wayne State University, where Conner took all her graduate-level classes, got most of Conner's loan money, which it used to pay its instructors and administrators. But what did Wayne State provide Conner for all this cash? Apparently not much because Conner is still a school teacher, which is what she would have been even if she hadn't borrowed all that money to go to graduate school.

In my view, the Conner story is an illustration of QE in the higher education sector. The federal government is pumping billions of dollars a year into the corrupt and mismanaged higher education industry, and it is getting only about half of it back. Moreover, in far too many cases, the students who are borrowing all this money aren't getting much in value.

How long can this go on? I don't know, but it can't go on forever.

Note: I am indebted to my friend Richard Precht for pointing out the relevancy of Quantitative Easing to the student loan crisis.References

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About Me

Richard Fossey is a professor at the University of Louisiana in Lafayette, Louisiana. He received his law degree from the University of Texas and his doctorate from Harvard Graduate School of Education. He is editor of Catholic Southwest, A Journal of History and Culture.